Online Extra: FitzSimons on Tribune's Tough Times

Facing a trial by fire lately, the CEO explains how he's trying to address the problems head-on

Tribune Co. CEO Dennis FitzSimons has been in the top job at the $5.6 billion-a-year media giant for just 18 months. But he's already wrestling with big new headaches, including a revenue shortfall at The Los Angeles Times and a circulation scandal at Newsday and Hoy that are clouding prospects for the Chicago-based company.

FitzSimons is moving fast. He's cutting costs in the publishing group, including accepting The Los Angeles Times' management recommendation to cut some 200 jobs, and has launched an in-house audit of the circulation shortfalls. He's also scaling back revenue predictions for Wall Street, saying growth this year now will come in at about 4%, not the 6% expected earlier. Finally, he's wrestling with a June 24 U.S. Appeals Court decision that has rendered uncertain Tribune's (TRB ) ability to own TV stations and newspapers in the same markets, such as Los Angeles and New York.

FitzSimons insists the difficulties haven't made him question whether the $8 billion purchase of Times Mirror, in 2000, was a good idea. Still, Tribune's stock, nearly $61 a share in late 1999, before the deal, has yet to regain lost ground. After struggling back above $52 in February, the stockwas trading around $45 as of July 7. FitzSimons recently met with BusinessWeek Chicago Bureau Manager Joseph Weber and talked about his plans for rebuilding confidence in Tribune. Edited excerpts from their conversation follow:

Q: It seems like June was the month from hell for you, a Trifecta of troubles -- the Newsday and Hoy circulation woes, problems with growth at The Los Angeles Times, and now the layoffs, and the media-ownership situation. Are there days when you wonder whether you should have taken this job?

A:

No, not at all.

But if you want to start with the media-ownership rules, not unexpected. On media-ownership, we expected some type of remand that would involve the diversity index, and that's exactly what the court's decision involved. But there were a number of good things in there, in terms of how they talk about the cross-ownership rule and the right of the FCC [Federal Communications Commission] to eliminate that rule. So we were very encouraged by that. The part we're not encouraged with is the additional delay.

Q: What does that stem from?

A:

The FCC has a few options. The court did something that was unusual in that they kept jurisdiction and effectively told the FCC to go reconsider its diversity index and come back to them with further justification for the cross-ownership rule.... They can do what the court has asked, or they can go to the Supreme Court and petition.

So we'll see how the FCC reacts to that. From our point of view, we have until 2006-07 until our TV licenses in New York, Los Angeles, and Hartford expire, and that's the first time there would be any impact by a retention of the regulation. We've always said that if the FCC's process is not finished by '06 or '07, the likelihood is they would issue a waiver to us pending a completion of the rulemaking, which has been in process for a long time. Or if for some reason the court or the FCC determined to keep the [ban on cross-ownership] in place, we would take it to the Supreme Court.

Q: What's the practical effect? Does it cause you to hold back on any further acquisitions, to hold back on any growth, until there's some certainty?

A:

Under the existing rules, we have plenty of room to grow on the television side. We're at 30% for FCC purposes and would have the ability to go to 39% -- that cap was determined by Congress. So on the television side, we have plenty of flexibility. And also on the newspaper side. It really just depends on what opportunities present themselves.

And right now, because there seems to be some uncertainty in the marketplace and seller expectations are high, we're buying back a lot of our own stock, which we think is a terrific investment for the future.

Q: Buying back the stock, as opposed to buying stations or newspapers?

A:

Right. Right now, we have confidence in the strength of our businesses. So we think the best way to return capital to shareholders is to buy back our stock.

Q: But right now, you're not interested in buying media properties?

A:

Right now, we're looking. We just haven't recently seen acquisitions that met the kinds of returns that we look for.

We've been looking for clarity in terms of the regulatory environment so all the players in the market know what rules they're playing under. That's the most important thing we could have happen for the industry.

Q: And you didn't get that clarity from this decision?

A:

We got clarity in terms of what the FCC can do, but there still is going to be some delay until the diversity index is clarified, before the court is satisfied with the FCC's rationale.

Q: You also talked about the LA Times situation -- what's the problem with growth there?

A:

The Times has been impacted by the retail consolidation, some changes in advertising buying patterns by significant retailers in the market, and weakness in the national advertising category. But the paper overall is in excellent shape. Witness the five Pulitzers that it won. In terms of the staffing cuts that were announced recently, this was a reaction on the significant sudden revenue downturn that occurred in May.

Q: I think overall it's about 200 jobs....

A:

Overall, yes.

Q: But that's a particularly one-off situation in Southern California?

A:

We've had certain other cuts across the newspaper group, but Southern California is the most significant because the revenue shortfall there was the most impacted.

Q: It raises the question of advertising softness across the board. Southern California is the worst case, I guess. Is that a concern to you? It would seem that the economy has been booming, confidence is back, classifieds are back. Why is that not translating into really strong ad growth?

A:

Overall, we've had good growth. But because the LA Times such a significant percentage of our publishing revenue, and we've had softness in Southern California, that has brought the results of the group down somewhat.

But on the television side, we're expecting a good second half. We had tremendous results in the first six months of last year. And what we had told investors back in December was that we expected a reasonable first half and stronger growth in the second half on the television side, and our second half overall would be better. And that's the way the year is playing out.

Q: In TV, ad revenue is strong, and the margins are much healthier. It makes me wonder about the health of the newspaper group and the wisdom of the balance you currently have, with over 70% of the revenues coming from print. Do you feel it's a little unbalanced, that you ought to have more TV?

A:

We've said in the past to investors that we would probably see more acquisition opportunities come on the television side. But we feel very positive about the strength of our newspaper franchises. In a fragmenting media environment, newspapers continue to represent a great vehicle for advertisers. We have tremendous reach within our markets and the ability to deliver detailed advertising information in an environment that readers actually want to see advertising.

Q: What about the circulation situation at Newsday and Hoy -- is it troublesome to you? Have you launched a full-scale investigation of all 14 newspapers?

A:

No, we haven't launched an investigation. We've got confidence in our other newspapers, but we're verifying that confidence.

Q: How are you verifying it? Have you hired Kroll or something, or are you doing in-house audits?

A:

We're doing in-house audits. We're establishing certain additional standards, quarterly certifications that the circulation directors will attest to.

Q: In all seriousness, how would you characterize the month of June? It was just one thing after another for you. Was it the month from hell or what?

A:

No. It's a month that -- look, we've been waiting for the court decision, number one. We're pleased that it came out, and let's get to the next step to ultimately get to clarity.

In terms of the circulation issues at Newsday, we don't want to have those kinds of situations, but we're dealing with it aggressively, and we're getting to the bottom of that situation. And then, finally, we're communicating as forcefully as we can to investors and to our advertisers, and that's the most important thing we can do at a time like this.

What's the impact of these situations on our company going forward? We're communicating internally about A) no unethical behavior is acceptable.... It will not be tolerated. And B), one of our core values for 157 years has been integrity, that's what the company is based on. We can't have any lapses in that regard.

Q: The problems seem to be coming from the Times Mirror side of the house. Are you wondering whether this deal was a good idea in retrospect? It seem to have brought you a peck of trouble.

A:

No. The deal was the right thing to do. In a consolidating media environment, having scale is an advantage.

Q: Do you feel it's a testing period for you right now? Is it an issue? How will you get the company back on track?

A:

The company is on track. We've had a few people in the Newsday and Hoy situations that have cast doubt on our circulation figures in one business unit, two business units.

We need to correct that. We need to investigate it, correct it, communicate to our constituencies, advertisers, shareholders, and our employees all the steps we're taking to make sure going forward there are no ethical lapses, and that our company is taking the right steps to position us for the future. So that's the challenge, and that's what we're doing.

Q: The market has been unkind to the stock. It's around $45 or so [as of July 7] –- that's a healthy ways from $30, around where it was in 2001, but it's also a good way from $61, where it was in 1999. What's your sense of that? What does it say about the company and what are you doing to boost that stock price?

A:

We see this as a buying opportunity, and we're investing ourselves.

Q: How much?

A:

$600 million so far this year, and we have probably another $750 million that we can buy, that we're authorized to buy.

Q: This is probably the worst period you've had since you've been CEO. Can you think of a worse one?

A:

I've been CEO since '03. Was chief operating officer before that. We had a record year in '02, a record year in '03. And sometimes these things come your way. And it's how you deal with them that determines your success or failure. So we're dealing with them in the most straightforward, aggressive way that we can.... That's my job.

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